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With Interest Rates Dropping, Is Now the Time to Refinance?

The New York Times' Lisa Provost reported today that when interest rates drop noticeably, astute homeowners react quickly as they’ve been doing in the weeks following Britain’s vote last month to leave the European Union. The decision rattled the markets, mortgage rates fell to near-record lows, and refinancing applications took off.

In the week after the vote, Zillow reported a 132 percent surge in refinance requests through its online mortgage marketplace, while the Mortgage Bankers Association’s weekly measure of application volume showed the highest level of refinance applications since January of 2015.

Refinancing can be a way to cut monthly payments, if rates fall considerably below a homeowner’s original mortgage rate. It can also help in other ways, enabling homeowners to pay down debt more quickly on a shorter-term loan or tap into equity for home improvements and other needs. And available equity has grown in recent years, thanks to rising home values: Some 38 million homeowners now have at least 20 percent equity in their homes, worth an average of $116,000, according to Black Knight Financial Services. That’s up from about 31 million just three years ago.

But figuring out whether it makes sense for you requires considering a number of factors. “The key question is, how long am I going to be in the home?” said Erin Lantz, the vice president of mortgages for Zillow. “Am I confident that I am going to hold the mortgage longer than it takes for me to cover my closing costs?”

For homeowners who plan to stay put, adjustable-rate mortgages may not be the best way to go. But with interest rates so low, even fixed-rate mortgages are appealingly low at the moment — well under 4 percent. While they have risen a little since the post-Brexit low, as of July 26, the average for a 30-year fixed-rate refinance was 3.45 percent, and 2.74 percent for a 15-year fixed-rate refinance, according to Bankrate.com.

Another thing to consider: Borrowers who are well into a 30-year mortgage should try to shorten the term of the new mortgage when they refinance, if they can afford to do so and plan to stay put, said David Edwards, the president of Heron Wealth, an independent wealth advisory firm in New York. “If you have 20 years left on your 30-year mortgage, and you roll into another 30-year, you’re going to hit retirement still paying,” he said. “Go into a 15-year mortgage and cough up the higher payments now.”

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